Investing in polluting companies could be more effective than green funds in reducing CO2 emissions.
So-called "green" funds are often presented as a way of directing capital towards more environmentally-friendly companies, while excluding those considered "brown", i.e. the most polluting. This logic seems attractive: by depriving polluting companies of financing, we encourage those with more sustainable practices and put finance at the service of the planet. However, a recent study by finance professors Samuel Hartzmark and Kelly Shue calls this idea into question and highlights a paradox of green funds.
Analyzing the CO2 emissions of 3,000 companies over an 18-year period, Hartzmark and Shue demonstrate that, against all odds, investing in green funds could be counterproductive. Indeed, certain industries, such as building materials, emit considerable quantities of CO2, far more than sectors such as insurance. A cement manufacturer, for example, generates 1,000 times more CO2 than an insurer for equivalent sales. Yet when an insurer receives additional financing, it does not necessarily reduce its CO2 emissions, while a cement manufacturer that fails to finance its transition projects risks continuing to pollute more.
An unequal redistribution of capital
This paradox is based on the fact that green funds often focus on companies that are already relatively "clean", excluding those that would nevertheless most need financing to succeed in their ecological transition. As a result, the influx of capital into so-called "green" companies does not necessarily reduce their CO2 emissions, while more polluting companies find themselves without the resources they need to implement more sustainable solutions.
The study's authors stress that effective environmental finance should not be limited to discarding assets considered toxic. On the contrary, it would be more strategic to invest in the most polluting companies, but in a massive enough way to influence their strategy and encourage them to adopt more sustainable practices. In other words, investors should focus on the real impact they can have on global CO2 emissions, rather than simply choosing seemingly less polluting companies.
A necessary paradigm shift
This study calls for a reassessment of sustainable investment criteria. By refusing to invest in carbon-intensive sectors, green funds risk missing out on the opportunity to support companies that, with the right financing, could make significant transformations for the environment. Cement manufacturers, heavy industries and the fossil fuel sector, traditionally seen as investments to be avoided from a sustainable perspective, could nevertheless play a pivotal role in the fight against climate change, provided they have access to the financing needed to modernize their infrastructures and adopt cleaner technologies.
The real challenge, then, according to Hartzmark and Shue, is to move away from an approach that seeks to make finance "greener" on paper, to embrace a strategy that focuses on real impact. This could mean investors accepting to "get their hands dirty" by supporting companies that are furthest from today's green standards, but which have the potential to significantly reduce their CO2 emissions through well-targeted investments.
Towards more efficient green finance
Hartzmark and Shue's study highlights that the effectiveness of green investments depends on investors' active engagement with target companies. By combining this commitment with financial and regulatory pressure, the most polluting companies could be incentivized to rethink their business models, adopt cleaner technologies and significantly reduce their greenhouse gas emissions.
Thus, green finance must evolve to go beyond simply excluding toxic assets and focus on transforming the most polluting sectors. This shift will enable investors to truly use finance to serve the planet. Samuel Hartzmark and Kelly Shue's study invites us to rethink sustainable investment: rather than avoiding polluting companies, green finance could have a greater impact by supporting them in their efforts to reduce emissions. This paradox of green funds highlights that, despite their good intentions, they could be holding back the environmental advances they aim to promote.
Source: The Paradox of Green Funds, Samuel Hartzmark & Kelly Shue. Image: Nik Shuliahin via Unsplash
This post was translated from the original French